Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Monday, June 14, 2010

Krugman: F.A. Hayek Wants You to Lose Your Job

One of the reasons I started this blog was to highlight the real differences between Keynesian "economics" and the economics of the Austrian School, and to defend Austrian concepts against the missives coming from Paul Krugman of Princeton University and the New York Times. Thank goodness, mine is not the best or most articulate voice from the Austrian camp, and I have highlighted others, including Robert Higgs, who I believe is infinitely a better economist than Krugman.

Krugman over the years has refused to explain the Austrian viewpoints in anything but outright caricatures and exaggerations. For example, here we get what he calls the "Hangover Theory," which outright misrepresents everything written by Ludwig von Mises, F.A. Hayek, and Murray Rothbard on the subject of business cycle theory.

In this June 14 post on his NYT blog, Krugman once again refuses to take a serious look at what the Austrians claim, deciding, instead, to place them in a false light in order to make them seem as though they are united by one thing: hatred of humanity. He takes the following quote from Hayek as his example of Austrian cruelty:

…still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed.The only way permanently to ‘mobilise’ all available resources is, thereforeto leave it to time to effect a permanent cure by the slow process of adapting the structure of production.

If one reads Hayek carefully, he is saying that when governments hold down interest rates to artificially low levels, they actually BLOCK the economic recovery, yet all Krugman can see is "persistent high unemployment." Krugman writes:

These days, relatively few economists are willing to say straight out that they regard persistent high unemployment as a good thing. But they find reasons to oppose any and all suggestions to use government policy — including monetary policy — to alleviate the slump. Same as it ever was.

Notice that Hayek has not said any such thing, but to Krugman, free markets and an economy not steered by government must by definition have "persistent high unemployment," although he does not explain why that would be so. (In fact, Krugman seems to believe that he really is above any such explanation, as his declaration alone should be regarded as ex cathera.)

In claiming that economists like Joseph Schumpeter and Hayek were champions of depression, Krugman (and his partner-in-crime Brad DeLong) violently misrepresent the Austrian viewpoint. The Austrians don't claim that the Great Depression was a "good thing," but rather the Great Depression occurred precisely because governments intervened in the economy to prop up malinvestments and to keep the necessary liquidations from occurring. Because of those policies, the economy got both liquidation AND high unemployment.

Unfortunately, Krugman and DeLong never see that simple point. In the Austrian view, we have EITHER liquidation of malivestments or long-term high unemployment, with any high amounts of unemployment coming from the liquidation process being temporary. Krugman and the Keynesians, on the other hand, believe that once the liquidation process begins, the economy never recovers. Ever.

With their great, simple faith in the efficacy of government spending as a macroeconomic balance wheel, vulgar Keynesians disregard malinvestment, past and future, and support government spending in excess of the government’s revenues, the difference being covered by borrowing. Of course, they favor central-bank actions to make such borrowing cheaper for the government. In fact, they chronically prefer “easy money” to more restrictive central-bank policies. As noted previously, they prefer easy money not only because it lowers the cost of financing the government’s deficit spending, but also because it induces individuals to borrow more money and spend it for consumption goods ― such increased consumption spending being viewed as always a good thing, notwithstanding the recent near-zero rate of saving by individuals in the United States. Reflecting on the vulgar Keynesian attitude toward Fed policy, I keep recalling a old country song whose refrain was: “older whiskey, faster horses, younger women, more money.”

Vulgar Keynesians do not spend much time worrying about potential inflation; on the contrary, they are obsessed with an irrational fear of even the slightest hint of deflation. If inflation should become an undeniable problem, we may count on them to support price controls, which, they are convinced on the basis of sketchy knowledge of such controls during World War II, can be made to work well.

16 comments:

What do you think about what I write here - http://www.economicthought.net/2010/06/krugman-on-hayek/ ?

A much deeper theoretical argument is necessary, because whether we like to admit or or not both sides are simply basing their arguments on theoretical premises which are assumed correct (both sides, of course, believe there premises are logical, but they are assumed at least when making these more general blog posts).

Have you read some of the comments on Krugman's blog? Absolutely ridiculous.

"Krugman and the Keynesians, on the other hand, believe that once the liquidation process begins, the economy never recovers. Ever."

How do you expect people to take you seriously when you write things like this?

I think it's reasonable to point out when caricatures of theories are presented. It's inevitable when we are all differentially steeped in each of our own literatures, and highlighting that is a good way of making sure things stay clear. But then you go right around and do precisely the same thing.

James -On the 1920-21 recession and tax cuts - the tax cuts came after the recovery was underway. In the first round, Harding cut the tax rate for the top bracket and maintained the same rate for the lowest bracket. However, the top bracket was broadened considerably so more people who were in the lower brackets were put into the top bracket. The effect was a slightly higher average tax rate in the beginning of the Harding administration and during the recovery.

Harding didn't reduce the average tax rate or reduce rates across all brackets until I believe 1923 (perhaps 1922). In either case, after the recovery. It's unfortunate that guys like Tom Woods gloss over these details.

You stated that Dr. Anderson risks not being taken seriously because he said Keynesians believe an economy would never recover from a ‘liquidation process’ without government intervention. Based on what Dr. Krugman said, I am not sure why.

Dr. Krugman did accuse Hayek of preferring persistent unemployment to government fiscal and monetary intervention. Looking up persistent in the dictionary I see definitions such as ‘constantly repeated’ and ‘continuous.’ In a thesaurus I see synonyms like ‘everlasting’ and ‘perpetual.’ How exactly does an economy recover from recession if unemployment is everlasting?

Dr. Krugman is a Keynesian, and if Keynesians don’t really believe what he suggested, I think Dr. Krugman should have been clearer about what he meant.

Can you please write an ultimate blog post about why noone should take Krugman seriously, by summarizing the main things he has written in the past that have turned out to be completely wrong, plus the main inconsistencies in his writings?

This would save all of us some time, and we could just link to your post when we come across people that actually take Krugman seriously.

Richard -The first thing I did was look up "persistent" in the dictionary too because I've never thought of it as a synonym for "forever". I found "existing for a longer than usual time or continuously".

Let's be serious here. Have you ever read anything from Krugman suggesting that unemployment would never end, ever? Have you ever read anything by any Keynesian suggesting that? If so, could you please provide me the link because that's news to me. I'm not sure what dictionary you're reading but I think it's obvious that you're imputing this to Krugman if you think he means "forever".

And this is really my whole point. This post isn't analysis, it's semantic gymnastics attempting to create a controversy where there really isn't one. If you really believe that Keynesians think that unemployment would remain at 10% forever without government intervention, then you really don't have a good understanding of Keynesianism.

I really wish there was a way to cushion this point, but there isn't. The idea that Krugman said unemployment would go on forever is absolutely absurd and has no basis in (1.) economics, (2.) anything Krugman has ever written before, and (3.) the usage of the English language. It's irresponsible and misleading to write that sort of thing.

To answer Daniel, there is NOTHING in the Keynesian view that allows an economy to recover without government spending. Look at the theory; what would permit the economy to move back to full employment if the government does not "stimulate" it with more spending?

Tell me this: Does Krugman have ANY reason to believe that the economy could return to full employment EVER if the government does not act? I think that is a legitimate question. It is not enough to say that I am declaring an absurdity. Read Krugman and tell me if he believes that ANY economy can operate without lots and lots of government spending.

"Dr. Krugman did accuse Hayek of preferring persistent unemployment to government fiscal and monetary intervention."-----------------------------------------------This is off point, but was that really Hayek's position? From comments on Sumner's blog, I gather that Hayek would not have been averse to taking steps to stop a deflationary spiral, and that he was not really in the same "liquidationist school" as Rothbard, etc.

The more I sit back and watch all the economists - from the MMTers to the New Keynesians to the Monetarists (although they don't call themselves that anymore) to the Austrians - the more I get the sense that each "school" itself is divided into yet more sections! And, of course, each school is convinced of its own righteousness.

I think I'll head back over to the physics department. There's some real science going on over there.

ETA: I almost bought "The Road to Serfdom" tonight. Is it really a classic? Something truly valuable to be added to one's library?

Hayek's book went to number one on Amazon because it was pushed by Glenn Beck on Fox. I wonder how Krugman feels about that?

William - You're the one making the undemonstrated claim. You can't claim Krugman thinks it would never recover, and when I challenge you on it and ask for times he said it would never recover then challenge me to find alternative incidents. Don't make the claim if you can't back it up.

As for Keynesians - of course it can recover without government stimulus. Anything that shifts aggregate demand will do the trick. Real balance effects can do the trick. Wage declines can do the trick under certain conditions (not others). Capital obsolescence. A decline in liquidity preference. Hell, why not a simple black-box "return of animal spirits". Of course Keynesians think the economy can recover without the government - I'm a little suprised you didn't realize it.

The case is that under certain conditions the recovery will be slow, painful, rigid, and all unnecessarily so. The key here is "under certain conditions" - those conditions being a demand-driven recession like this one, not a supply-shock recession like we've experienced in the past.

Now - can you back up the claim that Krugman ever thought that the economy would never recover, or can't you?

You still don't give causality. Why do "animal spirits" suddenly change. Krugman also has claimed that wage declines will lead to a downward spiral that keeps going down.

From where do the "real balance effects" come. What about "capital obsolescence?" In fact, Keynesians don't have a legitimate capital theory, other than "capital happens." How do declines in liquidity preference occur?

So, no, you have not caught me in a "gotcha" moment. Sorry. Give causality, not magic.

Which is why I called animal spirits a black box - but it doesn't make them unreal.

I don't speak for Krugman, Wayne. You need to consult chapter 19 of the General Theory for the Keynesian view on wage declines. Under certain conditions they are efficacious and under certain conditions they aren't.

Economists don't make causal statements about psychological givens. You don't explain why people's preferences change when you talk about preferences, do you? Of course not. What are animal spirits and liquidity preference is not preferences just like the sort of subjective preferences that Austrians and Keynesians both deal with? Under certain subjective preferences the economy will be stuck in a depression. When, for whatever reason, those subjective preferences change the economy will come out of a depression in the Keynesian system. The causal statements that economists make are statements about the behavior of the economy given a set of psychologically determined preferences. And the Keynesian system, primarily through an addition of liquidity preference, provides a causal system for explaining what happens when those preferences change.

But you can't expect me to answer what causes subjective preferences than I can expect you to answer that same question for the Austrian school. That's the definition of "subjective", Wayne! It's not ours to explain!

Keynes doesn't have a legitimate capital theory and the Austrians don't have a legitimate theory of output. They both went in different directions in what they emphasized. That's why I'm personally interested in the project of integrating Austrian capital theory with a Keynesian model.

The schools of thought have their differences, but don't spread these absurdities about never having a recovery, or "magic". Try to be serious when you disagreew ith people.

Krugman is saying that Hayek shows no empathy for those unemployed during the time that it takes to "effect a permanent cure by the slow process of adapting the structure of production."

I don't understand your point. What is a recession/depression if everyone who wants a job has a job? Would people really care if GDP is contracting if everyone is employed with a decent income? It would be a non-event.

Without trying to put words in his mouth, I believe that Krugman is trying to say that in the end it is people that matter, not the "structure of production." You are arguing about why we are in a recession. That is water under the bridge. The question is what we should do now. Perhaps your answer is "nothing." If so, I wonder why the economy isn't going gangbusters right now. What is stopping all the people with money (there is a lot of money out there) from starting new businesses and hiring people?

Its clear when you read the words 'complete adaptation possible of the structure of production' that Krugman is right. This is a hangover theory where libertarians argue we must flagellate ourselves bank into shape. Not that governments BLOCK recovery just that 'malinvestments' will for some reason occur again we will go in the 'wrong direction'. Basically arguing that the investments are inherently bad and not the easy money that lead to them, which, is as far as I can see unaustrian. Krugman doesnt argue easy money forever for example after a recession and blames that for this economic crisis. Also Krugman doesnt argue the unemployment is always persistent just that libertarian writers are relatively ignorant of it and are more will to allow the economy 'naturally recover' than end the pain for the people who are suffering it in a recession.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).